Impacts of Taxation on Small and Big Businesses - Essay Example

Impacts of Taxation on Small and Big Businesses in UK Introduction The diverse nature of business organisations needs a thorough consideration in the tax system design. Business organisations take two forms either big or small. Small businesses include small incorporated firms that are taxed as companies and the self-employed sole traders that are taxed as individuals. Big businesses take the forms of companies (Taylor 2007, pp.194–196). Several economic activities can be carried out either through employees working in a comp any or through individuals who are self-employed. Similarly, several activities can be done either by an individual who is self-employed in his or her own small business or by a person who owns, manages and is the employee of his or her own business. If the treatment of tax of the income is derived from such activities differs greatly depending on the legal form in which the businesses are conducted, then the system of tax is more likely going to have a strong influence on the ways small and bug businesses are structured. Without any good reasons for favouring one legal form over the other, such distortions ought to be avoided. This will need both the same treatment of income from employment and self-employment within the personal system of tax and a similar treatment of income derived from small business and from small unincorporated business within the whole tax system (Welsh & White 2001, pp.18 – 27). As well as having these variety of legal forms, a second fundamental reason as to why small business do present vital challenges for tax design is that the income derived from the activities of small businesses do reflects a mix of rewards for labour supplied by those who work for the business and returns to the supplied capital by those who invest in the business (Button 2009, pp.389–408). Impacts of Taxation on Small and Big Businesses in UK Taxation on Small and Big Businesses in UK The United Kingdom business community makes a huge contribution to the treasury’s coffer every fiscal year in terms of tax contribution. In the previous financial year, a total of one hundred and sixty three billion sterling pounds was paid as taxes by the business that are operating in the UK. Breaking the contribution of the business further down shows that, in addition to paying tax on the profits, businesses also contribute. This is based on their roles as the owners of the property, consumer of goods and services, employers and the impact on the environment (Adams et al. 2008, pp.101–115). It is also important to note that businesses contribute to the efficient running of the system of tax and the economy of the country, on top of their direct contribution as tax. While these do not count as direct contributions to the revenue as tax, they reveal that the business activity underpins the existence of tax flows and economic growth beyond those it pays and collects (Hasseldine et. Al. 2011, pp.39-52). Over the past ten years, the United Kingdom system of taxation has moved from the principal of similar treatment on tax application to substantively similar sources of income to a quite extraordinary degree. One of the examples that were most remarkable was the zero rate of corporate tax that applied only to the first ten thousand sterling pounds of taxable profit of a company. In combination with other features of the tax system of UK- most notably, the individual allowance below which personal income is not to be paid (Barker & Rubin 2008, pp.54–60). Since it was elected in the year 1977, the labor government has been focussing on taxing small businesses in the UK. This has been in tandem with all the concerns in other regulatory areas on ways of reducing the small business burdens, encouraging investments to take place and entrepreneurship promotion. In United Kingdom, small businesses are seen as the engine of economic growth and creation of jobs hence worthy subjects of government assistance. The entirely predictable response to this tax advantage was the sharp rise in the number of small businesses that chose to incorporate and operate as small businesses and companies. Initially, it was hailed by the UK government as a policy aim at promoting enterprises, this response by the small business proprietors subsequently leads to the same policies of being characterised by the same government as encouraging the avoidance of unwanted tax. There was the restriction of zero rat of corporate tax to the profits that were undistributed, but later it was removed (Bell & Jenkinson 2002, pp.1321–1346). Currently the United Kingdom has a fifty percent tax rate on all incomes; this was introduced as one of the final acts by the previous labour government. The rules on tax rates are greatly complicated because politicians have tinkered with them. The main problem with this is that the more it gets complicated, the more opportunities are opened for loopholes. In addition, asymmetric treatment of losses and profits is another feature of tax system that has an impact on large and small business firms differently. When the profits are positive then they are taxed but when negative they do not attract full tax there may be justification for targeted forms of tax support that would be favouring some smaller businesses, example- those taking great expenditures on investments or research and development- more than any other typical large business or company. However, it is very difficult to rationalise the degree and nature of tax advantages to the small business seen in United Kingdom (UK). The tax breaks are of significant effect to the business both large and small in the current system in UK (Basioudis & Francis 2007, pp.143–166). The recent budgets in UK are focusing on the economy of new enterprise aiming at relieving small and medium enterprises thus encouraging entrepreneurship and removes tax barriers to small business. In the UK, sole partners and traders are similarly taxed; this means that they are both unincorporated forms of business that are subject to be taxed. The integration of the business and the personal taxation forms an essential point of the unincorporated business taxation. The aggregate of the total income of a company and the chargeable gains for the period of accounting forms its profits for tax Purposes Corporation. In the case of a larger business or company, there are little reasons for the Inland Revenue to deny a deduction for the cost of salary and benefits paid to directors and the employees who are senior. They represent an arm’s length negotiation. In normal cases, small and medium enterprises usually deduct employment costs in full including the cost of benefits and salary to the managers (Bell & Jenkinson 2002, pp.1321–1346). There is increased tendency amongst economists and politicians to equate entrepreneurship to incorporation. Recent changes in the rates of tax in the UK in particular have encouraged incorporation even where this may not be desirable for commercial reasons. In the UK, it is cheap to incorporate and the government is even planning to make it cheaper. Impacts of Taxation The taxation of small and big businesses in the United Kingdom over the last ten years indicates a tension existing between the government’s desire to enhance activities that ae associated with certain kinds of business and a concern of the same government to protecting the personal tax when huge number of small businesses are taking advantage of the tax breaks that are poorly targeted (Chittenden et al. 2003, pp.493–508). A reduction in the income tax puts more money into the employee’s pockets and since most of the people do spend what they earn, this increases the consumer expenditure and hence ultimate surge in demand. Therefore, consumers will buy more of the goods if they wanted more or will go on to trade in price or quality. The tax breaks for small businesses are more likely to create high demand throughout the rest of the economy than for the better offer who may decide to save more. When the government decides to increase the income tax, it will have an opposite effect as it will reduce discretion expenditure. High taxes for both small and medium businesses are more likely to change the behaviour of the consumers in terms of the risks they are prepared to take. Both small and big businesses can pay their capital gains tax if they sell a capital asset, rather than trading like a stock, for a profit but the main issues regarding capital gains will only arise when the business itself is put on sale (Mason & Harrison 2000, pp.137–148). In UK, several reliefs are given to entrepreneurs who have sacrificed their short term rewards by leaving profits in the business to finance their growth in the future. More often an entrepreneur of either big or small business see their business as their pension, and an asset fit for sell to the finance their retirement. Several small and big businesses in the United Kingdom have a choice of registering for VAT or not. Businesses that are not registered to VAT do not charge their products. This gives them a huge margin of profit or pricing advantage to their saes compared with other competitors. When the government decides to increase the VAT rates, the businesses are not only forced to increase their costs but also their pricing advantage as well. Those big and small businesses in UK that do register for VAT, any slight increase in the rates become a burden to the administrations (Che-Ahmad & Houghton 2006, pp.53–72). If the rates of VAT change, then the prices of the goods sold should also change thus creating short term difficulties with labelling. Changes in VAT affects the consume ability to purchase at the margin. However, the United Kingdom has seen a decline in the rates of VAT from seventeen point five percent to fifteen percent. But today, it has increased to twenty percent on most of the items being sold by small and big businesses excluding children clothes and food (Keeble et al. 2001, pp.439–457). For long, both small and big businesses have been affected directly by the changes in the rates of the tax imposed by the UK government. Increasing tax rates indicates that the business will incur high cost of production and consequently increasing the consumer prices. When the government decides to increase the tax or exercise duty on certain items being imported to the United Kingdom, the price of such commodities will have to increase thus dampening the demand. Some businesses in the United Kingdom have decided to move their tax residence to a different territory. This decision has been made as a result of the high tax rates in the UK. Because of this, several UK companies having their headquarters in the country earn from foreign operations. Despite the fact that so many businesses trying to run away from the UK high rates of tax, their headquarters still remain in the country. The tax rates affects the profit margins and thus businesses cannot run efficiently thus affecting their production ability (Joulfaian & Rider 2008, pp.675–687). Conclusion Taxation of any business is usually inherently complex. It involves the boundaries between corporate taxes and personal taxes, between labor tax and capital income. The United Kingdom tax treatment has a significant impact on the decisions of the business investors of either small or big corporations whose shares are internationally traded. However, increasing the capital costs for small domestic companies would cause undesirable effects. Having a reformed tax system in the United Kingdom would eliminate most existing incentives for small and big businesses to adopt a certain legal forms purely for tax reason. This should be aimed at reducing the tax burden to the businesses and consequently lowering the consumer price burden. It should also aim at minimising the cost on small and big firms. In addition to lowering the burden, adequate measures on the UK tax will be decisive in reducing the number of companies based in the country but operating outside the UK thus creating job opportunities for UK citizens (Besley & Persson 2013, pp.51–110). In conclusion, UK tax system is among the highest in the European member countries. It system affects both big and small firms directly and indirectly translates to high consumer burden. With many UK businesses now thinking of operating beyond borders, the UK government must come up with the best tax system strategy to halt the mass exodus of the business and safe guard the citizens opportunities through enacting better tax laws. References Adams, M., Hardwick, P. & Zou, H., 2008. Reinsurance and corporate taxation in the United Kingdom life insurance industry. Journal of Banking and Finance, 32, pp.101–115. Barker, T. & Rubin, J., 2008. Macroeconomic Effects of Climate Policies on Road Transport: Efficiency Agreements Versus Fuel Taxation for the United Kingdom, 2000-2010. Transportation Research Record, 2017, pp.54–60. Basioudis, I.G. & Francis, J.R., 2007. Big 4 audit fee premiums for national and office-level industry leadership in the United Kingdom. Auditing, 26, pp.143–166. Bell, L. & Jenkinson, T., 2002. New Evidence of the Impact of Dividend Taxation and on the Identity of the Marginal Investor. The Journal of Finance, 57, pp.1321–1346. 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